Will NVIDIA Go Down in 2024?

With a gain of nearly 240%, NVIDIA (NASDAQ:NVDA) stands out as best-performing stock in the S&P 500 in 2023.

Riding so high on the wave of artificial intelligence, some are worried that a precipitous fall could be on the horizon, are they right?

13x Profitability Growth

In NVIDIA’s Q3 earnings report, the company detailed total revenues of $18.1 billion, an increase of 206% from the year-ago quarter with the vast majority accounted for by the $14.5 billion generated by the data center segment.

Profitability was even more impressive with GAAP earnings up by 13x on a year-over-year basis to $3.71 per share. 

Another major positive was the fact that operating expenses increased by just 16% on a year-over-year basis, suggesting that the company has finally reached a scale at which its growth rate can significantly outpace the spending required to produce it.

NVIDIA also has a decidedly impressive long-term track record of growth in terms of both revenue and earnings.

The company reported quarterly revenues of over $1 billion and earnings of a nickel per share as recently as a decade ago. Since then, the numbers and mushroom-size growth speaks for itself and reflects very well on management.

Looking to the future, the consensus forecast suggests profitability will continue to rise, growing at a CAGT of 42.4% over the next 3-5 years. The top line is also expected to balloon higher by nearly 50% in the coming year, an astonishing achievement on the back of already gigantic growth.

Nvidia Is Trading at a High Premium

To say that NVIDIA trades at a high price based on its current performance would be something of an understatement. At 40.3x forward earnings, nearly 160x cash flow, and 27.3x sales, NVDA shares trade at a massive premium.

The stock’s price-to-earnings-growth ratio, a metric commonly used to value fast-growing companies, is currently 2.7. PEG ratios in excess of 2.0 are generally thought to indicate overvaluation.

Despite metrics suggesting Nvidia has run past its fair value, price targets for the stock range from $535 to $1,100 per share, implying returns of anywhere from 9% to 124%.

The median price target for the stock is $650, a potential gain of 32% from present levels. And over 80% of the 52 analysts covering the stock also rate it as a Buy.

NVIDIA’s Headwinds

Because of the sky-high valuation, uncertainty around NIVIDIA’s future international sales could be met with severe disappointment.

Restrictions on the sale of AI-related technology to China are expected to significantly impact the firm’s data center revenues. They have already caused analysts to cut FY 2025 revenue forecasts by over 15%, suggesting that slower may lie up ahead.

The company will also face renewed competitive risks from Intel and AMD, both of which are investing heavily in their own lines of generative AI hardware. AMD, in particular, scored a major victory in December as Meta, OpenAI and Microsoft all announced plans to use the company’s MI300X AI chip.

This development shows that major tech companies are actively looking for cheaper alternatives to the NVIDIA chips that have powered AI development up to now. If NVIDIA is pressured to lower its prices in order to compete, the company’s sales and earnings growth may be on the precipice and about to fall.

It’s also not yet clear how robust the current surge in AI investment and development will be. Bulls can point to studies that show strong productivity gains among workers using generative AI and projections suggesting that the technology will contribute over $15 trillion to the global economy by 2030.

There is, however, a more bearish case to be made. Early implementations of the technology in real-world businesses have produced mixed results, and many intended users prefer to circumvent AI assistants and go directly to a human expert instead.

Will NVIDIA Share Prices Fall in 2024?

NVIDIA is currently priced at a level that leaves management no room for error when it comes to delivering the high growth rates analysts predict for the company.

Reduced sales in China and increased competitive pressure are likely to both weigh on revenue and earnings growth over the coming 12 months. At its current price, NVIDIA trades on assumptions of a best-case performance scenario.

While there is no doubt that the business itself has produced exceptional results, the share price appears to be too rich to account for the real-world risks the company faces.

Signs of investor disillusionment with NVIDIA’s valuation may have already started to appear. On the day of the Q3 earnings release, the stock slid modestly in spite of the extraordinary results the company reported. Given this fact, it seems likely that even very positive future earnings reports could fail to send shares appreciably higher until key value metrics contract to more sensible levels.

NVIDIA shares may not fall substantially in 2024, but it’s quite possible that they could plateau as investors grow wary of the high valuation.

Until earnings and cash flows begin to catch up with the prices investors are paying for the stock, future price surges seem unlikely. If management fails to deliver on growth expectations due to one or more of its business risks, though, a selloff could be triggered.

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